Concessions deal math hasn't added up to promised state savings

By KEITH M. PHANEUF The Connecticut Mirror

Publication: The Day

"Ladies and gentlemen, this is a historic agreement," Gov. Dannel P. Malloy told the crowd assembled in the dark-paneled Old Judiciary Room of the state Capitol.

Six months after insisting upon $2 billion in concessions from the state's 45,000 workers, Malloy announced on Aug. 18, 2011, that unions had approved something worth more than $1.6 billion in the short-term. The deal, he pledged, would dramatically enhance state government's finances for decades to come.

"It represents the most fundamental restructuring of the relationship between state government and state workers that has ever occurred in the State of Connecticut," the governor said.

But there was even more riding on that deal than the state's present and future finances.

Politically, it was crucial step for a governor who had just asked voters to accept the largest tax increase in state history. Malloy could say workers not only would be giving back, but doing so far more generously than they had for any of his predecessors.

Malloy also grabbed the national spotlight, claiming in television appearances that he had carved out a successful alternative to the harsh austerity path so many other states' governors had traveled. And along the way, nearly 5,000 layoffs had been averted.

Fiscally, the deal was nearly as important.

The average annual savings of $800 million would cover more than one-fifth of the $3.7 billion shortfall Malloy had to close.

And the $21 billion in savings the governor pledged his deal would provide over the next two decades offered a vision of hope to a state whose financial picture is mired in debt.

But the deal didn't deliver as planned and from the start was shrouded in a secrecy that Malloy's critics quickly jumped on as a stark contradiction to his campaign pledge of a transparent and accountable government.

While no government agency has calculated precisely how much each concession saved, the administration's own numbers show the package fell nearly 30 percent shy of its savings target by its second year - a $250 million gap.

More importantly, nonpartisan legislative analysts have acknowledged their inability to assess the deal, with the administration unable - or unwilling - to share the necessary information.

When Malloy proposed his next budget, six months after union ratification, savings expectations had been downgraded by about 30 percent, a gap that contributes to the $1.2 billion budget shortfall the governor faces in the coming fiscal year.

Breaking down the deal

"This has become the pattern with this governor," said House Minority Leader Lawrence Cafero, R-Norwalk, who is weighing a 2014 gubernatorial bid. "He says if you take this medicine, all of these great things will happen. But he never documents or backs it up."

"The truth of the matter is it was an appropriate and necessary concessions package," said Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, who said a deal of this scope couldn't please everyone. While some Republicans argue it didn't save enough, some in labor felt it demanded too much.

The state employees' concessions agreement had several components, including:

• A two-year wage freeze in exchange for four years of protection from layoffs;

• A requirement that all workers forfeit 3 percent of their annual pay to help cover their retirement health care;

• A $100 per month premium increase and a higher deductible for all workers refusing to participate in a wellness program that required annual physicals and other screenings;

• Increased prescription drug and emergency room co-payments;

• New limits on pension calculations, an increase in the retirement age and a stiffer financial penalty for early retirement.

The deal was supposed to save $701 million in 2011-12, though many lawmakers acknowledged the administration was handicapped in its effort to hit that target. Unions had rejected the package in mid-June, and the fiscal year already was 1½ months old when the second vote brought ratification in mid-August.

The big test would come in the 2012-13 fiscal year, when the projected savings was $901 million.

But when Malloy proposed that budget in February 2012, and when lawmakers adopted it three months later, the $901 million in concessions savings had decreased to $648 million in actual spending reductions spread across agency budgets.

Why it shrunk by almost $253 million is not clear.

The ink was still wet on a tentative agreement and the unions' approval was still pending when lawmakers got their first hint that the deal would be difficult to parse.

Nonpartisan legislative analysts reported on June 4, 2011, that they could vouch for less than 40 percent of the promised initial savings because of unanswered questions or insufficient data.

The Office of Fiscal Analysis had the most trouble assessing pension and health changes, or the efficiency savings targets.

"Please note that at this time we are unable to determine or verify the levels that are contained in these estimates in many cases," OFA Director Alan Calandro wrote.

So what is known about concessions savings?

If the wage freeze provided nearly half of the $648 million in spending reductions built into the current budget, what role might the other components have played?

Beyond the bullet points

Originally expected to save $65 million, concessions-induced retirements may have been the saving grace of the Malloy plan.

The governor kept his pledge not to pay financial incentives to encourage well-compensated, veteran workers to retire.

But while Malloy refused to pay senior workers to retire, he never said anything about discouraging them from staying on the job.

The concessions deal ordered several new pension restrictions aimed at all who retired after Oct. 1, 2011.

The result was an unprecedented exodus.

More than 2,600 state workers retired during the first three-quarters of 2011, about 2½ times the number recorded at that point in the previous year. Though the administration acknowledges it's impossible to guess how many people retired just to avoid the concessions changes, Barnes has said that it likely produced well more than the original $65 million per year savings estimate.

Changes in health care were supposed to save $203.4 million this year.

The administration had assumed that half of all workers would elect not to join the wellness program and would pay higher premiums and deductibles that would save the state $120.5 million.

According to Comptroller Kevin P. Lembo's office, only about 1 percent of workers chose not to join.

This year, that means a savings of less than $815,000 from premium hikes. If all workers outside the wellness plan also pay the full $350 deductible, that represents another $237,650.

New pension limits were supposed to save $183 million this year while the state's actual contributions would shrink by about $20 million.

But, again, a simple comparison is unfair.

On one hand, Malloy and the legislature agreed to boost pension contributions dramatically one year after the deal took effect, and that ate up much of the savings.

State pension actuaries also noted that the surge in retirements weakened the pension fund. Each retirement means a worker not only has stopped paying into the fund, but also has begun drawing cash out. When this happens in large numbers, the state must contribute more.

The effects of the concessions deal - and its shortcomings - are felt today.

According to the administration, the cost of maintaining current services and programs next year is $616 million higher than Malloy officials had anticipated two years ago - another important factor behind the $1.2 billion shortfall projected for the next budget.

The $253 million difference between expected and achieved concessions savings alone represents more than 20 percent of that.

This story originally appeared at CTMirror.org, the website of The Connecticut Mirror, an independent, nonprofit news organization covering government, politics and public policy in the state.